Rewind back to 1990, and the troops were busy selling IT Outsourcing & Offshoring which traditionally started with pictures of Taj Mahal and discussions on Aryabhatta (an Indian mathematician who is supposed to have invented numeral “Zero”). Year 2000 acted as a catalyst resulting in IT Outsourcing and Offshoring becoming mainstream businesses.
Then close to 1997-98, call centers & help-desk centers (customer relationship management centers) outsourcing became a rage. At the same time HR outsourcing was being seeded while Finance and Accounts Outsourcing sneaked in as a captive process outsourcing to begin with so that companies could really leverage outsourcing as well as global collaboration as a cost productivity measure.
With so much being outsourced, it appeared that we were reaching the end of road in terms of processes. Everyone seemed to have forgotten the procurement groups spread across various Fortune 1000 companies which could also gain significant efficiencies by being outsourced to companies specializing and focused on this. More so PO can be the biggest bang for the buck:
PO has much higher potential savings than other BPO functions
*Source- Everest Research Institute (2006)
We saw a glimpse of PO wave in a different form in year 1995-2000. It was in the form of emergence of lot of e-consolidators who talked of a web based portal which they claimed was panacea to reduce the costs & problems, which now is remembered (or rather not remembered) as a star-studded flop movie. The real opportunity lies in a combination of several factors which include technology platform & capability, outsourcing methodology, process maturity, industry knowledge delivery capability, live procurement experience on the top of everything associated with change management in outsourcing. Even the typical offshore model might not work as a company with lack of experience in the PO can really expose the client’s spend which can run in several hundreds of millions of dollars to risk. Irrespective of Industry verticals, procurement function is something which gives immediate scope in cost reductions, which I am sure that many will argue against. Majority of time, companies end up in spending almost 40-60% of their budget in procuring goods and services. Interestingly if we study a typical Procurement process flow, we will find that buyer spends almost 60% of their time & resources in doing administrative work rather than strategic in nature, which apparently deviates the focus from buyer’s core competency and results in inflating budget and makes cost reduction like a mirage in desert phenomena.
Solution of this problem could be more attention and resources on strategic activities which includes, planning, developing strategies and challenging specification. So if the tactical work is outsourced to a PO company and strategic procurement is retained internally, it can result in focus which can drive significant improvements in the bottom line.
Studying last few years of trend and growth in Procurement, we will find that companies are looking at option of outsourcing their different Procurement functions. These functions may vary from buying and commodity specialist to Value and product quality engineers. Order management, order fulfillment, Compliance management, logistics and spend analyst is also something which companies are looking to outsource
Direct Vs Indirect spend
At a high level, we can classify procurement into two major categories:
- Direct Category
- Indirect category
- MRO (Maintenance, Repair & Overhaul)
Traditionally enterprises have been more open to outsource the procurement management of indirect & MRO spend categories than for direct materials, such as those used in manufacturing industries. Most of the companies are outsourcing or plan to outsource are relying on third-party procurement services for computer equipment and peripherals, transportation/logistics/shipping, systems integration, IT services, office supplies/furnishings, temporary labor, and travel, which has been a primary target for outsourcing. Expertise available on indirect side of Business includes, Category specialist, Buying, Transactional Processing & Logistics. However the jury is out on the kind of savings, the companies got by outsourcing it. Most of the time, the approach has been to throw multi-million dollar upgrades to hardware, software applications including spend management tools etc on which establishing ROI has not been an easy task slowing down the Outsourcing Process. Market can catch fire, if someone can offer guaranteed savings form the first year of engagement like it happened in several other areas of outsourcing.
Direct Procurement outsourcing includes functions like Buying, Contract administration, Value Engineer, Quality Engineer, Logistics, NPI & Customer Support etc. Till now direct materials have been considered as the Holy Grail and ‘untouchable’ but now the approach has been changing. It has been realized that there is a significant piece of non-strategic direct procurement which could be as high as 60% by number of transactions (number of parts in discreet manufacturing) with only 10-20% in spend. Can this be outsourced? Yes and it can increase the effectiveness of the internal procurement organization significantly. Trends are showing up in automotive industry which is suffering right now to outsource significant direct procurement tactical pieces to companies which can guarantee cost reductions from year one of outsourcing contracts. The savings for large automotive companies can touch several hundreds of millions of dollars as some of the reorganization experts will include PO as powerful tool to their advantage. There are few powerful case studies in the transportation industry already.
PO: Fastest Growing BPO
There is significant activity building up in several Global 1000 companies both on direct and indirect procurement and companies with demonstrable experience, guaranteed operational cost reductions with transparent supplier management, IT capability and global collaboration advantages stand to win several hundreds of millions of dollars of annuity contracts
Companies that have outsourced procurement activities reported that they had done so for a variety of reasons. These include to:
- Focus the procurement organization on important categories and higher value-added activities.
- Reduce costs of transaction processing.
- Tap into external category expertise and use the market leverage of the outsourcing provider.
- Reduce cycle time and improve sourcing efficiency.
- Gain access to information technology tools without major investment.
- Establish and develop minority suppliers.
Though procurement outsourcing was developed at the same time as other BPO tasks such as finance, accounting, HR, etc., it is only now that procurement outsourcing have shown growth in massive proportions.
India: A prime destination for Procurement Outsourcing
According to NASSCOM, A nascent yet rapidly growing vertical, procurement outsourcing is slated to emerge as India’s successful outsourcing story.
India has the potential to be a favorite destination for PO not because of labor arbitrage but due to its highly skilled English Speaking labor pool, engineering skills, value enhancement through LCCS, competitive advantage, process & quality focus. The absence of category expertise on several commodities in India will have to be filled through capability build up in US and Europe. To be clear, just any company doing offshore, small or large can not execute PO successfully as it is far more complex and requires many year’s of experience or it could create serious risks for the outsourcing company along with the client.
My belief is that Procurement Outsourcing will lead the pack in outsourcing initiatives in next five years saving global companies billions of dollars. At the same time companies specializing in this field have opportunities to be the leaders of tomorrow with focus and drive to provide significant value to their global clients.
The author of this article is Mr. Rakesh Mittal, President & COO, Corbus
Also read more about Procurement Outsourcing on bpmwatch.com.